Externalities

Question 1

Define negative externalities

Answer 1

Costs to third parties who were not involved in the transaction between to agents

Question 2

DWL

Answer 2

There is DWL from producing at the private optimum, instead of pq

Question 3

Negative externalities in consumption =

Answer 3

Demerit goods

Question 4

Define positive externalities

Answer 4

Benefits to third parties who were not directly involved in the transaction between the two agents

Question 5

Positive externalities in consumption =

Answer 5

Merit goods

Question 6

To move to social optimum for externalities in production

Answer 6

Could use taxation or subsidies.